UK office construction forecast to plunge after Brexit vote

By Julia Kollewe
December 06, 2016

Construction cranes at Embassy Gardens in Battersea, south-west London. Fewer developments will rise in future, warns Savills. Photograph: Matthew Lloyd/Getty Images

The Brexit vote will lead to a slump in office construction, with up to half of planned developments in central London likely to be postponed or scrapped in coming years, according to estate agent Savills.


Commercial development has barely recovered from the post-financial crisis slump, and the uncertainty surrounding the terms of Britain’s departure from the EU will trigger another 30% to 40% decline across the country in the next five years, , Savills said in its annual forecasts. Central London will be worst hit.

Its report said: “The seismic shock of the Brexit vote brought transactional activity in many cases to a juddering halt, a pause at least to reconsider pricing as opposed to pulling out of deals.”

Several commercial property funds suspended trading in the summer to stop withdrawals from panicking investors fearing a collapse in property values, but all funds have since re-opened.

Worried about the impact of Brexit on the City, banks are considering moving operations to mainland Europe and there have been warnings that 100,000 jobs could go if London loses its ability to process euro-denominated transactions. This would sharply reduce demand for new office space.

Savills is predicting a 4% fall in UK office prices next year followed by a 1% drop in 2018. Thereafter it forecasts a slow return to growth, pencilling in price increases of 1.1% in 2019, 2.5% in 2020 and 3.2% in 2021. This translates into 1.6% growth over the five-year period.

Mat Oakley, head of UK & European commercial research at Savills, said: “In London offices we have seen about a 5% fall this year, and there is probably another 2% to 3% to go – assuming we get a reasonably soft Brexit.”

The gloomy predictions come a week after the City's biggest tower, 1 Undershaft, receive planning permission. The developer, Singapore-based Aroland Holdings, says it will house 10,000 workers. Another tower at 22 Bishopsgate has also been given the green light. The developer, French-owned fund management firm Axa, had warned before the referendum that that it might pull out in the event of a Brexit vote, but decided to push ahead in October.

Commercial property prices in the UK are predicted to rise slowly in the coming years

Guardian graphic | Source: Savills
Savills commercial property forecasts

Oakley said there had been an increase in overseas investors piling into London offices and other UK commercial assets since the June referendum, all attracted by the weaker pound. As domestic investors are in retreat, the proportion of foreign buyers is about to rise to a record high of about 60% between October and December, up from a recent average of 42%.

While the Brexit vote came as a shock in June, other events such as the election of Donald Trump in the US and the upcoming elections in France and Germany next year meant that the UK is regarded as somewhat less risky than before, he added.

With London property so expensive, investors from the Middle East have been hunting for cheaper deals outside the capital, in places such as Birmingham, Edinburgh, Glasgow and Bristol.

The Savills report said: “Lower levels of domestic demand, particularly at larger lot sizes will give non-domestic investors a clearer playing field.” The next five years are likely to experience record levels of international investment in commercial property outside London, ranging from office blocks to shopping centres, warehouses and data centres.

Mark Ridley, chief executive of Savills UK and Europe, said: “The sterling devaluation has made UK property very attractive for international investors pegged to the dollar or euro, with 2017 activity in central London likely to be dominated by Asian investors, with American and pan-European investors also strong nationally.”

Sterling has lost 13% of its value against the dollar since the referendum and is down almost 9% against the euro. At one stage it had lost almost 20% of its value.

Savills commercial property forecasts

Another draw for foreign investors is that they continue to be taxed in the same way as UK buyers, unlike countries such as the US which have imposed extra non-dom taxes.

Savills also sees an end to the post-credit crunch house price boom, forecasting that residential prices will flatline next year after five years of increases. London’s luxury property market has been hit in particular, as Brexit uncertainty and increased stamp duty have been putting off foreign buyers.

Lucian Cook, head of residential research at Savills, noted that there had been a shift in housing policy under housing and planning minister Gavin Barwell, with a bigger emphasis on building more homes across a wider range of tenures such as homes for rent. But a representative from Church Commissioners, who manage the Church of England’s £7bn investment fund, suggested that Cook was painting too rosy a picture.

https://www.theguardian.com/business/2016/dec/06/uk-office-construction-forecast-to-plunge-after-brexit-vote